By NATHAN KOPPEL
Widespread efforts by companies to prevent consumers from pursuing class-action suits against them are increasingly getting quashed by state courts.
The New Mexico Supreme Court last week followed several other state courts in holding that a consumer agreement prohibiting class-action suits violates that state's public policy and is "unconscionable." The case concerned Dell Inc.'s requirement that its customers pursue claims through arbitration, and on an individual basis only.
"The opportunity to seek class relief is of particular importance to the enforcement of consumer rights, because it provides a mechanism for the spreading of costs," the court ruled.
Dell declined to comment on the ruling. "As a general statement, we believe arbitration is a quick and effective means for resolving disputes," a spokesman for the Texas-based computer maker says.
Over the past 10 years, companies in industries as diverse as credit cards, technology, automotive and telecom, among others, have increasingly required customers to agree to pursue claims through arbitration and to waive their right to join class actions, either in arbitration or in court, as a condition of doing business. Other industries, such as the securities brokerage business, have long used arbitration clauses that do not include class-action prohibitions and are not affected by the recent court decisions.
Trial lawyers and consumer groups say that class actions are a vital method for redressing wrongs in cases in which no single plaintiff has suffered sufficient damages to justify the costs of filing an individual suit. But companies maintain that plaintiffs' lawyers, in search of big paydays, routinely file spurious class actions that yield at most negligible awards for their clients -- even though defendants often settle because of the risk of a huge verdict.
In the Dell case, Albuquerque, N.M., resident Robert Fiser filed suit in 2004 claiming that the company had misrepresented the memory size of its computers. The company declined to address that claim and sought to have it thrown out of court. Mr. Fiser seeks to bring his case as a proposed class action on behalf of everyone who has bought a Dell computer over the past eight to 10 years, says his attorney, Whitney Buchanan.
Dell seeks a court order that Mr. Fiser must arbitrate his claim on an individual basis. Since Mr. Fiser sustained alleged damages "of just ten to twenty dollars," the New Mexico court ruled, "by attempting to prevent him from seeking class relief, [Dell] has essentially foreclosed the possibility that [Mr. Fiser] may obtain any relief."
F. Paul Bland Jr., a lawyer with Public Justice, a Washington, D.C., nonprofit that filed an amicus brief in support of Mr. Fiser, calls the ruling the biggest legal win for consumers this year. "The enforceability of class-action bans is the most important and most hotly contested issue in consumer law."
The opinion follows a recent string of rulings invalidating class-action bans. Since 2006, state supreme courts in Illinois, New Jersey, North Carolina and Washington have struck down such bans, even as some lower courts have upheld them. Lawyers say these and similar rulings apply only to smaller-dollar claims in which consumers would, in effect, have no means of redress if they could not join class actions.
"There is an increasing sense on the part of courts that [corporate] accountability in the marketplace is being eliminated" by class-action prohibitions, says Michael Greenfield, a professor at Washington University School of Law who specializes in consumer law. He believes the New Mexico ruling could have an impact beyond the state. "There is a desire among state courts to reach decisions which are consistent with what is going on in other states," he says.
Alan Kaplinsky, a Philadelphia lawyer who assists companies in drafting arbitration clauses, says that in many state courts, "unfortunately, there is an orientation towards doing things to protect the plaintiffs' trial bar, including ruling that consumers, in effect, have an unwaivable right to bring a class action." But many federal courts, he says, have upheld class-action bans. The Federal Arbitration Act, he says, "does not permit a party to an arbitration agreement to do an end run around it by filing a class action."
Federal courts, lawyers say, typically apply state law when considering whether to strike down class-action prohibitions. "As state supreme courts increasingly find that [class action] waivers are unconscionable, I would expect that the federal decisions would increasingly strike the waivers as well," says Jean Sternlight, a law professor at the University of Nevada, Las Vegas, School of Law who specializes in arbitration.